How did nearly half of recent homebuyers get a mortgage rate below 5%? Loaner

Everyone knows that high mortgage rates have been a total drag lately, especially for potential buyers facing sky-high asking prices.

But what if I told you that almost half of those who recently purchased a home still have an interest rate below 5%?

This seems quite unlikely, given that the 30-year fixed rate returned above 7% and never fell below 6% for the duration of 2024.

However, that hasn’t stopped 45% of “mortgage buyers” (cashless buyers) from getting a mortgage rate below 5%, according to a new survey from Zillow.

As for how to do this, the most commonly cited reason was special financing offered by the seller or builder of the home.

Special mortgage rates from home builders

One of the most common ways to get a below-market mortgage rate is through home builders.

They often operate in-house mortgage companies to ensure their clients reach the finish line.

And through a financing tool called “term commitments,” they are able to offer very low mortgage rates to customers who use their captive lender.

These commitments involve purchasing low mortgage rates in bulk, up front, and then rolling out those low rates to customers purchasing properties in certain communities.

While some only offer temporary rate buydowns, many have recently offered permanent rate buydowns for the full 30-year loan term.

This probably sounds pretty cool, but keep in mind that you have to buy a newly built home to qualify for a special rate.

Some have argued that the discount is baked into a higher sale price, so be careful.

Also read my article on using a home builder’s mortgage lender to learn more about this.

As a reminder, sellers of single-family homes may offer sales concessions that can also be used to reduce the mortgage rate.

And with manufacturer buyouts, this is the most frequently cited reason for the low rate of 35%.

Another 26% said their offer was conditional on a rate buyout by the seller/builder. Thus, more than half of the low rates came solely from these arrangements.

Buy points to reduce your fare

The third most common reason a recent home buyer was able to get a low mortgage rate was paying discount points (at 23%).

If you have the funds available, it is always possible to lower your rate by paying a little money up front.

This is a form of prepaid interest where you pay today to save tomorrow. The key, however, is to hold on to the loan long enough to be able to save money.

The problem is that if mortgage rates fall further before the break-even point (when points become profitable), this deters rate and term refinancing.

Or if you sell the property too soon, same thing. On the other hand, temporary redemptions do not result in loss of funds.

If you sell/refinance shortly after a temporary buyout, the remaining funds are generally applied to the outstanding loan balance.

Long story short, there is risk when you buy points, in that you are leaving money on the table.

The same could be said of temporary buyouts in that mortgage rates may not fall when the rate returns to the higher note rate.

Many people bought the house and dated the rate, assuming mortgage rates would go down. So far, this is not the case.

You got a mortgage from a friend or family member

Another 23% of buyers said they got a low rate because they borrowed from a friend or family member.

This is quite surprising to me given that this is such a large portion of the population. I can’t imagine many home buyers getting special financing from mom and dad or anyone else.

But according to the Zillow study, that’s what the numbers indicate. For me, it’s pretty rare to use intra-family financing, but it’s certainly a thing, especially with much higher rates today.

An example would be your parents offering to finance the purchase of your house with a special reduced rate from the Bank of Mum and Dad, perhaps at 3.99%!

If you are so lucky, great. But for most, this is unfortunately not a reality.

Another common reason people got a mortgage rate below 5% was refinancing after purchasing the home.

They had to stay on schedule (and pay points) because rates never officially went below 6% this year.

Finally, mortgage rates below 5% were associated with adjustable-rate mortgages, homeownership assistance, and shorter loan terms, such as the 15-year fixed.

Of course, if it’s not a 30-year fixed rate, a rate below 5% doesn’t have quite the same meaning or value.

Still, it’s impressive to see that nearly half of homebuyers got creative and found a way to overcome the mortgage rate hurdle.

The problem is that we still have to deal with the high price of real estate, and there is not much we can do at the moment.

Zillow Consumer Housing Trends Report 2024 implied 18,500 successful home buyers and was implemented between March and September 2024.